The Decline in February AHE and Fed Policy

Some market commentators highlighted the decline in February Average Hourly Earnings (AHE) in Friday's Employment Report as an argument for the Fed not to hike in March.   There are reasons to be cautious about accepting this analysis.

1.  The -0.1% m/m decline in February's AHE can be attributed to calendar and job composition effects as well as to a partial offset to the +0.5% January jump. 

2.  The underlying trend in wage inflation supports the Fed's view that inflation should eventually move up to about 2.0% -- the y/y pace of the major measures of labor costs are about 2.0% (see table below). 

3.  The Core PCE Deflator already is moving closer to the Fed's 2.0% target.  Its y/y pace was 1.7% in January.

                              Major Measures of Labor Costs
                                    (4-Qtr Percent Change)
Year              AHE     Compensation/Hr       ECI     ULC
Q116             2.4                       
2015              2.6              2.6                        2.0        2.1
2014              1.9              2.9                        2.2        2.8

AHE = Average Hourly Earnings
ECI = Empoyment Cost Index
ULC = Unit Labor Costs